Share consolidation may give rise to new set of woes

While it is heartening to note that companies on the dreaded watch list under the new 20-cent minimum trading price (MTP) rule have three years to lift their six-month volume-weighted average trading price, pertinent questions need to be raised ("41 firms join SGX watch list as MTP rule kicks in"; last Thursday).

Is stock price purely a function of company quality or market conditions?

There are companies which have good fundamentals and sound net asset values, yet are trading woefully below their asset backing, even after share consolidations.

We are invariably facing the proverbial chicken and egg situation.

By enforcing consolidation, fewer shares are at play proportionally. Less liquidity causes share prices to go lower, slumped by the lack of trading. Where does this vicious circle end?

One only has to look at companies which have already exercised their share consolidation in the past 12 months. Many are struggling to maintain their prices above the MTP.

Share prices are determined by many factors. Certainly, the quality of the company, the quality of its business and, hence, earnings, are the primary factors.

Some of the companies that fall into the circle of the Singapore Exchange's (SGX) concern are perennial underperformers.

By forcing consolidation, is the SGX solving the issue or delaying the inevitable?

Many of the problems plaguing the related MTP issue are a legacy of the past. It goes to the heart of the problem: Were companies allowed to get listed too easily in the first place?

The SGX's attempt to realign and redress "penny stocks" may bring a whole new array of problems.

Notwithstanding the possible issues of "cornering", the possibility of unscrupulous majority shareholders suppressing prices and buying out the minorities at even more depressed values, we have to deal with other issues as well.

What if companies are not able to stay afloat above the MTP, despite their best efforts? They will be forced to delist after the three-year period.

Are mechanisms in place to determine the exit price? Or will this be left to controlling shareholders to decide, at the expense of minority shareholders?

While we can appreciate the three-year window offered, it is inevitable that some companies will fall through the gap.

Perhaps SGX could consider allowing companies to move down to Catalist as a way out.

It may be a loss of face, but it will give struggling companies more time and space to get their act together for the sake of long-suffering shareholders.

S. Kumar

A version of this article appeared in the print edition of The Straits Times on March 08, 2016, with the headline 'Share consolidation may give rise to new set of woes'. Print Edition | Subscribe